April 9, 2009 • 26 mins
There's been a lot in the news about Ponzi schemes lately. How do they work? And who's Ponzi? Check out this podcast from HowStuffWorks.com to discover how an Italian immigrant created a classic con that's still fleecing investors today.
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Speaker 1 (00:00):
Brought to you by the reinvented two thousand twelve camera.
It's ready. Are you welcome to Stuff you should know?
From house Stuff Works dot com? Hey, and welcome to
the podcast. I'm Josh Clark. Chuck say Hi, Hi, welcome people.
(00:21):
This is stuff you should know. Indeed, Chuck's got his
little jug of vodka. I got my Fresca and we
were ready to go. All right, Chuck, No, I don't wire, Chuck, Chuck,
do you know how we have these weblogs? Now, there's
like a stuff you should know? Weblog, a k a blog. Yeah, sure, yeah,
if you wouldn't be all hit or whatever. I do
know how we have that because I write on it
(00:42):
every day. I know. I was just starting a conversation,
Chuck lay off. Well, yes, sorry, Um remember that post
I put up yesterday that you said, like you read
three times and still couldn't make heads or tails of that? Yeah,
I didn't get it. Well, there's a there's a part
of it, uh, kind of the crux of the whole thing.
I don't know if that's the case or not, but anyway,
there's an aspect of it. And it was about these, um,
these two artists and um well, one of them just
(01:05):
goes by the name Arakawa, right, and his partner, and
I don't think just artistic partner. I think I think
that their life partners. Maybe her name is Madeline Gins, right,
And they have been quite successful at creating this architecture
UM that's intended to achieve immortality. Right. Well, the way
(01:28):
these two have done it is um by through surprising,
disturbing architectural choices. Right. Basically, their theory is that if
you create or if you live in an uncomfortable dwelling,
UM discomfort or comfort least the laziness and sedentariness, and
then that's ultimately what kills you. Holly unproven, but they
(01:52):
designed their architecture based on that theory, so they keep
you uncomfortable. And uh, it's unfamiliar. I think I know this.
I think we actually have an article on this. Like
the floors are undulating, undulating floors and uh yeah, I've
heard of that. They also like um kind of moonscape floors,
um angled like ceilings that just it doesn't sound like
(02:13):
a very pleasant place to live. Pretty interesting, this one
guy and these things go for there there. Just to
build them, they cost millions of dollars, but they have
built several most of them are lost in in Tokyo.
And this one guy who lives in one with his
family so that he's lost like twenty pounds and doesn't
have hay fever any longer since he moved in there. Yeah. Um,
(02:33):
but there their their whole firm is basically in jeopardy
because they were heavily invested with one Bernard made Off,
who you may may have heard. This guy's reach extends everywhere.
We're talking Kevin Bacon, right, and there's a six degrees
joke in there somewhere. Um, I imagine Kiras Sedgewick, since
(02:53):
Kevin Bacon is in there, Jaja Gabor Spielberg, Spielberg, And
that's just like the tip of the iceberg, right. I mean,
thousands and thousands of people were invested with this guy
and it turned out he was a Ponzi schemer. That's right.
It's a Ponzi scheme. Yeah, Chuck likes to say it
like that in a tribute to the Italian immigrant Mr
(03:14):
Charles Ponzi, who was running around in the twenties. And actually, yeah,
you want to talk a little bit about Mr Ponzi, Yeah,
I didn't know this until I read the article. Is
pretty interesting, and you know, Ponce's all over the news,
so it's kind of cool to get some background. Yeah. Oh,
and also we should probably say thanks to all the
people who wrote in and requested that we do this podcast.
This one's for you. Right. Bernie Madoff made off excuse
(03:36):
me himself, wrote in Yeah he did. He's like, hey,
can you tell everybody what I did? So, Yeah, in
the nineties, Charles Poncey. What he did was at the
time there was if you want to send mail overseas,
you would include what was called an international reply cupon
well if you wanted to reply, right. But it's basically
sort of like, uh, when you get something from you know,
(03:57):
magazine and the postage is prepaid to short in the card,
you know, right, it's it's prepaid so that you get
that back to say, hey, these people got that exactly right,
So this is what you did back then. Uh. He
had an idea. He said, Hey, if I go over
and buy these in a different country where they're cheaper,
I can come back and sell them in the United States, right,
And he could do this because these things were internationally recognized.
(04:20):
There was same in any country. But apparently they went
for different prices in different countries, so it's not a
bad business model, right right, I would say so. Uh,
And things went pretty well at first. He got a
lot of investors and made some pretty good money. But
the return that he promised, which what was it again,
it was a ridiculous promise. It was I think return
in forty to ninety days. So yeah, that should have
(04:42):
been a red flag right then we'll talk about that later.
But yeah, that didn't go as well as he thought. Um,
but he kept getting investors and he just kind of
kept this all quiet. So what he would do is
he would payback some to the initial investors based on
the money that the current investors were giving him, and
just kind of kept going in a cyclical way until
he had a lot of He started, you know, taking
(05:04):
a little money for himself and uh ended up having
you know, millions of bucks office in the nineteen twenties
before it finally crumbled. Um as a big scan. Well,
the reason he was found out was because somebody apparently
calculated that um, there would have had to have been
about a hundred and sixty million of these things extant
for him to be making the money he was making,
(05:26):
and the problem is that there was only twenty seven thousand.
That's that's kind of what found him out. But what
I got from this, what I got from reading about
Ponzi schemes, is that, Um, Charles Ponzi didn't appear to
be a huckster from the outset like he This is
actually a legitimate business that he was trying to run. Sure,
I think it was an act of desperation. Um, And well,
(05:49):
we should probably talk about exactly how Ponzi schemes work. Right,
they're pretty straightforward and simple. But I can't imagine that
as they just get bigger and bigger, you start to
eat a lot of rolaids. Right. I bet that that
was the original Ponzi scheme, and I'm sure he was
nervous as that was going if scheme scheme very nice.
So do you want to give some detailed explanation on
(06:11):
how Ponzi schemes work? Yeah, it's actually pretty simple. What
you do is you, um, you come up with an
investment a shell sort of, and you get people to
invest in You're in whatever you're saying you're gonna invest in.
In this case and in the original Ponzi scheme, it
was these reply coupons, but nowadays it's usually like a
(06:34):
stock thing. So you get these folks to invest, and
you take their money and essentially, uh use that first
rung of people to attract other people to invest. And
once you start getting other investors, you can pay back
those initial folks and they can go on record and say, oh, yeah,
you know I made a great return. That's right. And
then that more investors right and more wrongs, and you
(06:56):
just kind of it's sort of like robbing Peter to
pay Paul the entire your time, right, but you're pocketing
like Ponzi did some for himself. Right. At a certain point,
you can start skimming off the top, right. And but
it's not like it take the money and run proposition.
It's to take the money, stick around and pay people
off as much as you can. The problem is is
to like, people don't divest very easily. When they get
(07:18):
a better and unbelievable return on something, they want to
keep investing. Sure, So if you're like, no, no, you
can't invest anymore, Uh, the people are gonna start to
get suspicious. So you've got your first wrong, You've got
your second wrong. And then so on and so on
and so on. But to sustain it, you have to
keep adding more and more wrongs. But the more wrongs
you add, more difficult it is to pay everybody back.
(07:38):
So it's inevitable. But as some people will know they're
investing in a Ponzi scheme, some of those first wrong people. Yeah,
and yeah, from what I understand, people can actually make
money off Ponzi schemes. You get in early enough, and
you're smart enough to get out while they getting is
good because those are the people are gonna get paid first,
so they can vouch and say this is a really
great deal, right exactly. So yeah, so the whole that
(08:01):
that's pretty much a Ponzi scheme. And if it sounds
a lot like a pyramid scheme, do you you would
be right. Uh, it's virtually the same structure. The one
big difference is is that in a Ponzi scheme, you're
not asked to do anything. You're just an investor. They
just want your money. Uh. In a pyramid scheme, generally
you have to do something like you are buying in
uh to sell something? Sorry, well no, actually, um on
(08:24):
Amway site, they have uh like on an f a
Q section. It's like, is am Way a pyramid scheme?
And they're like, we're a pyramid model. Schemes the wrong
word to use, And actually the pyramid model has worked
for legitimate businesses Amway, Mary kay Avon, Um pamper Chef.
(08:45):
So yeah, so I mean it can work and it
doesn't necessarily have to be illegal. That that that's the
other distinction between Ponzi schemes and um pyramids models is
that Ponzi schemes are always fraud completely faults because it's
an investment, but the money's never invested. So it's so simple.
When I read this, I was just like, it's the
(09:07):
beauty is in its simplicity, Just like, give me a
bunch of money and I will keep it and get
more people to give me money. I'll give you a
little bit, and it's just amazing how that works. Can
you imagine being such an edgy, savvy investor that you
actually knowingly invest in ponzi schemes? Who does that? I
don't know. I bet there's some names on the on
the Maid off list. Yeah, I bet, I bet um,
(09:29):
But no, he did everything alone. We'll get to him
in a minute. Allegedly, not more, he confessed, buddy, Well,
we're certain things are still alleged at this point. All right,
well let's go with it. You're such a c o
a dude. But I appreciate the oh because that includes me. Um.
So Ponzi wasn't the guy who came up with a scheme.
He he did it so well that they named it
(09:50):
after him. But the earliest one we know about goes
back to UH eighteen eighty early eighteen eighties in Boston
with a woman named Sarah Howe. I don't think I
know about this one, okay, So she actually actively and
purposefully built a Ponzi scheme, although you know what, with
it being forty years before Charles Ponzi showed up, she
(10:11):
probably didn't call it that to herself. What was her name,
Sarah how scheme? Yes, if she were, if she did
have enough foresight to know that it would eventually be
called a Ponzi scheme, how would it sound in her
head when she said, this is the kind of scheme
that I'm carrying out. It's a um Anyway, Miss Howe
(10:32):
basically put together a m a group of thousands of
women investors, and UH invested in women's um women's liberty bonds,
I think is what they were called. Uh, that's supposedly
what the investment was for, but no, it wasn't. She
just basically carried out a Ponzi scheme UM and she
(10:52):
managed to rake in about half a million bucks before
she was caught. Uh. And then another guy shortly after
the turn of the century. His name was William Franklin Miller,
and he also builked investors for about another half a million.
And this is, you know, substantial enough to be remembered
a hundred years plus later. But Ponzi was the first one, right,
(11:15):
Ponsi was the first big one, I should say. Uh.
And then you don't really hear about anybody in in
the world of Ponzi schemes. I mean, I'm sure you can,
but nobody huge doing it right now. Well until Lou Pearlman.
Is that where you're going? I was going to go
to the Balkans first bolicity, Mr Pearlman. Okay, Yeah, this
is one of my favorites because his associations are kind
of funny. H Lou Pearlman, who I think you have
(11:37):
to say his name like Lou Pearlman. That's how I
got that impression as well. And he kind of looks
like that kind of guy too. He was. He kind
of funded the boy band craze in the nineties. And
I remember the Backstreet Boys because of the tattoo you
have on your neck, and uh, in Sync was the
other one. I don't know if you have a tattoo
of instinctly, okay, I was covering all my bases. Uh.
(11:58):
So he funded these bands. Uh, And it turned out
in two thousand six that he was running a big
Ponzi scheme. He had been for like twenty years and
a lot, you know, in Sync and the Backstreet Boys
were kind of funded on this Ponzi schemes. I don't
think funded kind of at all. I think they were
fully fully funded. Yeah, and this this guy created the
back Street Boys and in Sync and funded him with
(12:19):
illegal money. So those yahoo's kind of oh Ponzi with
their careers, yes they do. Yeah, well, their careers past tense,
right sure? Um timber Lakes done well for himself? Was
he in one of us? H J T I don't
know who that is. Um. Right back to Albania, Yes,
Albania basically a whole bunch of people were working this
(12:41):
big ponzi scheme, which from what I understand also uh
can extend the life of a ponzi scheme. Uh. Lou
Perlman is an unusual animal, uh, and that he could
carry it out single handedly for twenty years. Um. But
in Albania, for a while a group of ponzi schemers
UM had had one set up that builked these investors
(13:04):
out of two billion dollars before it collapsed, which is
in Albania, that is thirty of their gross domestic product.
That's huge, Like how to cripple a country? Yeah yeah,
and yeah, so yeah, I think Albania is probably second world. Um. So,
I think a hit like that is just ginormous. And
that was a big problem when it happened. It was
(13:25):
because when people found out, they started riding in the
streets and fires broke out and people died. Yeah yeah,
So that's the Albania, the old Albania ponzi scheme. And
we should note that Lou Pearlman he went to jail
or received a sentence of twenty five years for conning
three hundred million dollars, and apparently every million he paid back,
(13:46):
they cut a month off of sentence, which seems really fair.
I think so. But Pearlman million dollars sounds like a lot.
It ain't it was. And then two thousand and eight
came along the big daddy dude, this guy Bernard made Off,
one of the founders of Nastak. Yeah, which is one
reason why it works so well, because he was beyond
(14:07):
legit He was beyond legit um. Although he his One
of the other reasons he was so successful was that
he was smart. First of all, like Sarah, how he
used affinity fraud. An affinity fraud is where you are bilking.
You're you're using the inclusiveness of a of a group
(14:28):
to um against themselves, right, So he uh used his
membership in a a uber wealthy, very exclusive Jewish country
club down in Florida to prey on investors at first um.
And you know, the affinity fraud happens a lot like
and usually it happens with religious groups. Somebody comes in,
it's like, hey, I'm a Lutheran two and I've got
(14:49):
this great investment. Since he's a Lutheran, you know, he
seems up standing, you trust him, and then that's that.
But made Off very much used affinity fraud, at least
at first, and then news of his amazing returns got out.
But as I was saying, the reason he was so
successful is he he didn't pull a Ponzi and say
I'll get you fifty percent return in forty five days.
(15:10):
You know, Uh, he offered reasonable. I think eleven percent
was the average returns over the long haul, right, That
was the key. It was very believable, well to an extent.
Have you ever looked at our prospectus, the t RO
price prospectus or prospectus. Yeah, have you ever noticed, like
if you look at it like one year, three years,
five years, ten years, and it'll be up at one
(15:33):
year down, three years down, five years up. He was
offering like a straight even kill eleven percent return. You
couldn't lose, right, So that actually should have been a
red flag, but it wasn't. Um And in two thousand one, Barons,
the Financial rag they published a an article on him,
specifically saying made Off can't be offering these returns. Mathematically speaking,
(16:00):
this isn't possible. No one listened, But chief among the
people who weren't listening was the SEC. Yeah, and they've
been under a lot of fire lately. Because they did
not listen. They did not investigate, even when it was
kind of handed to them, like hey, several times, actually
here there were like two or three formal complaints h
to them and they never followed up. Well. One reason why,
(16:21):
and this is even another reason why he was successful,
is he was also running a legit business alongside it,
so he could sort of defer, you know, when he
needed to pay people back and things were getting tight,
he could pull a little money out of his legit
business and do that, and apparently did so promptly if
somebody wanted to um withdrawal. Yeah, they got to check
like that, no questions asked, Like when Kevin Bacon was like,
(16:43):
we're heading to Barbados and I need a million dollars
because I'm gonna buy a hut on the beach. Right,
I'm trying to hide my wife from her shame for
being in the closer right. Yeah. Um so yeah, made
Off was very, very successful, to the tune of what
twenty to fifty billion dollars he made off. I know
he's got the perfect name for it. I should have
been like, wait, what's your last name? Though I'm not
(17:04):
investing that. Every headline has already used that, so that's
probably stale by now. Yeah, thanks for that, Chuck. So
what what can you do? Chuck? How do you stay
out of a Ponzi scheme unless you're a very savvy
investor who's totally unconscionable. Well, uh, there's a few things
you can look for, um. And and it also should
be noted that a ponzi scheme is pretty much a
one way street to collapse. There's really no way to
(17:27):
pull it off in the long run sustainable unless I
think a lot of people might start these and think, well,
I can get out at a certain point, pay everyone
back and make a lot of money. Um. But yeah,
it's it's not a good working model in the end. Well,
apparently the point to a ponzi schemers to keep it
going until they die. Yeah, which is considered a big
success because you live like a billionaire and then uh,
at the end, you know you die or you know,
(17:49):
you off yourself. Speaking of that, did you know that
um after he was found out made off with spending
a hundred and sixty grand a month on personal security? Ah? Yeah,
do you know how many in Manhattan? Do you know
how many bodyguards that buys you. That's like delta force money.
(18:09):
Yeah yeah, uh so, yeah, some things you can look for. Um.
The obvious, of course is if it sounds too good
to be true, it is. That's the oldest adage in
the book, and it's true across the board. Uh So,
someone's making you promises on big returns, then you should
probably turn around and walk away. Don't let anyone pressure
you into doing well. Pressure that's another point too, is
(18:32):
I mean, it's usually going to be a high pressure pitch,
like you have a very limited time window maybe for
as long as the person standing there, um, and you're
made to feel like a jackass if you don't take
them up on it. Um. But yeah, yeah, pressure is
definitely one one of the factors. And even one like
you said that uh like made off scam where he
(18:53):
would not promise huge returns, that might make it a
little more believable. But everything, like you said, fluctuates, So
if it's a consistent even if it's a consistent like
five growth for years, then that should be a red
flag right there. And also you should um ask questions
and and demand answers as well, because I mean, if
you're just if you have a friend who has a
(19:15):
friend that has this great investment and you cut him
a check and it turns out to be a Ponzi scheme. Well,
t s for you. That was a stupid thing to do.
You should know what your money is being invested in.
You should know who's investing it. You should and even
if it's legitimate, you should be asking these questions if
it's through any of the major brokerages, by out how
many fees there are. Just just that's a good habit
(19:37):
no matter what. Uh. And the other thing is um
even if you're involved in a Ponzi scheme, even if
you get sucked in, uh, you should never it should
never break you and leave you bankrupt. Excellent point, Chuck,
because this is probably the most impotant important point. Well, now,
I say diversification is a key to a good portfolio,
and this is definitely true here. You should not invest
(19:57):
all your money in one thing. You just setting yourself
up for bankruptcy. And whether it's a Ponzi scheme or not.
Because you do all real estate and you're just totally
invested in real estate in two thousand and seven, you're
in big trouble. I mean, even Donald Trump, Uh, hit
the lowest of the lows at one point we all forget.
I think he's lost a lot of his old edge
that he used to have. He's made some bad decisions
(20:20):
like the TV show. Sure no one needs to see that,
you know. And if you if you do find yourself
in a Ponzi scheme and you're not the type to
take the law into your own hands with like a
tire iron or anything like that, you could always contact
the SEC. I don't know that they'll do anything, and
they probably won't, but it's worth a shot anyway, right right, Oh,
and we should just as a sidebar here, I know
(20:40):
that Madeoff did confess, but they are. There's a SEC
is still coming under fire because he's claiming that he
acted alone and didn't have any help with this, which
is really really hard to believe, just because paperwork alone
for scheme this size would be huge. And uh, some
people think out there that he probably had his family
(21:01):
involved and then did everything he could to cover for
them and take the hits right yet to come out. Well. Also,
even if they weren't involved, their salary came directly from
the bilking of other people, even if they somehow we're
just totally unaware of it. You know, it makes it
kind of I don't know, it puts it puts their
own wealth in question, right, So yeah, so that's a
Ponzi schemes. That was very good, Chuck, Thank you, Chuck.
(21:23):
Last time I'll say that. Are we are we going
to talk about our spoken word album? Yes? Yeah, and
then maybe we'll talk about blogs and then listener mail
stick around. All right, So we do have a spoken
word album, our first one, and it is about the
economy and economics. Everyone knows that we are in the
second Great Depression, and um, we just kind of decided
(21:47):
to make a spoken word album about that. That that's
such a an off a slightly off kilter description. It's
more like a guide, right right, possibly a guide to
the economy, that's what it's called. But it's very big, right,
Like there's a lot of stuff in it, right. Yes,
it's called the Stuff you should Know, super Stuffed Guy
(22:09):
to the Economy, and it's got expert interviews. Josh and
I get out of studio, we go in uh around
the working Farm, chicken Farm, don't spoil it. And Jerry
are awesome producer. She did excellent sound design and it's
got more bells and whistles, and it's it's definitely a
cut above the silliness we do here each week. Yeah. Yeah,
And you can find it by typing a super stuffed
(22:33):
in the search bar iTunes. It's frankly chuck and I
think it's worth it. I think so. So if you
want to get it, knock yourself out, get it a
couple of times if you like support us, Yeah, because
it blows up your computer after four to eight hours,
So unless you keep downloading it fresh each time, and
I'm paying for it over and over again, not sure
at all. All right, So there was that plug that
(22:54):
was plugged the blog. Yes, we've been plugging the blog now.
I hope you guys aren't sick of it yet. Um.
But Josh and I blog a couple of times a day.
He post once, I post once, and it's called stuff
you should know. You can find it on the right
hand side of our homepage at House of Works dot com.
And we just cherry pick interesting news items and kind
of like what we do here, except it may not
(23:15):
be enough to flesh out of full show. So yeah,
and a couple of times we've we've posted on listeners
suggestions like why don't you guys do this? Actually? Um,
so yeah, keep keep the ideas coming. We love them.
We do it keeps us from having to do any
real research. Just true, and you know what that leads
us to listener mail time. That's right, Okay, Josh, this
(23:37):
is an installment of stuff we should know, stuff we
should have known. No, it's not, because sometimes it's additional things.
Qu's saying that. This one is from Sarah, and Sarah
wrote in UM about the word theory versus hypotheses. Sarah
is a teacher, and we say all the time, someone's theory,
(23:58):
someone's theory, and he says, we've been misusing it. She
says in the thinking cap podcast you repleted, you repeatedly
referenced theories about savantis um and left hemisphere damage, and
scientifically speaking, these are not theories, their hypotheses. So her
basic point is that a theory is not just an
educated guest. It's h something that a lot of detail
(24:20):
and research has gone into to get to the point
where you can call it a theory, like the theory
of evolution, which is often dismissed as oh, it's just
a theory, but a theory is actually got a lot
to it. So Sarah wanted us to set the record straight,
so we did that. Another little minor correction here, josh
said at one point we were the only country that
(24:41):
uses uh, the imperial system. I thought we got this
out of the way with the bodies on ever supodect,
we did not officially U s Burma, Liberia and Myanmar.
Myanmar and Burma are the same place, Okay, have it
ever since the junta? It's now Myanmar? Look at you?
So Rich from Omaha, Joshua from You, Claire Wisconsin, Stephen
(25:04):
from Newark, Delaware, and Jeanne or Gene Gene. They all
wrote in and told us that, and I have one
more and I like this one. Stephanie wrote in and
told us that on our afrods X podcast, we're talking
about phallic symbol and fallacies, and we were talking about
an oyster. Apparently there is a word for something that
(25:24):
resembles the female genitalia. Yeah. I was interested to hear
this because we kept saying female genitali. And I wish
that she had written in before then. And we knew
that phallus only represented the male genitalia, but I did
not realize there was one for female. Yannick y o
n I see and she said, Yannick or Yanni is
Sanskrit for the word womb vulva in place of origin.
(25:46):
And she said she just wanted to tell us this
because for one of the first times in her life
she actually knew something Yonnick. So thank you Stephanie for
the Yeah, thanks Stephanie getting it. I'm processing it right now.
So Yanni, canoa remember the famous tennis player? Yeah, I
knew that there's any reference to female, genn tell you Odd.
I don't wonder if he knows that. I'm sure sort
of surely. But now, so, if you want to point
(26:07):
out that there are other words Chuck and I are
unfamiliar with, basically, let me know that I shouldn't call
my crackpot theories theories but hypotheses instead, or just say hi.
You can send us an email to Stuff podcast at
how stuff works dot com for moralness and thousands of
(26:28):
other topics. Is it how stuff works dot com m
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Brought to you by the reinvented two thousand twelve camera.
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From house Stuff Works dot com? Hey, and welcome to
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(00:21):
This is stuff you should know. Indeed, Chuck's got his
little jug of vodka. I got my Fresca and we
were ready to go. All right, Chuck, No, I don't wire, Chuck, Chuck,
do you know how we have these weblogs? Now, there's
like a stuff you should know? Weblog, a k a blog. Yeah, sure, yeah,
if you wouldn't be all hit or whatever. I do
know how we have that because I write on it
(00:42):
every day. I know. I was just starting a conversation,
Chuck lay off. Well, yes, sorry, Um remember that post
I put up yesterday that you said, like you read
three times and still couldn't make heads or tails of that? Yeah,
I didn't get it. Well, there's a there's a part
of it, uh, kind of the crux of the whole thing.
I don't know if that's the case or not, but anyway,
there's an aspect of it. And it was about these, um,
these two artists and um well, one of them just
(01:05):
goes by the name Arakawa, right, and his partner, and
I don't think just artistic partner. I think I think
that their life partners. Maybe her name is Madeline Gins, right,
And they have been quite successful at creating this architecture
UM that's intended to achieve immortality. Right. Well, the way
(01:28):
these two have done it is um by through surprising,
disturbing architectural choices. Right. Basically, their theory is that if
you create or if you live in an uncomfortable dwelling,
UM discomfort or comfort least the laziness and sedentariness, and
then that's ultimately what kills you. Holly unproven, but they
(01:52):
designed their architecture based on that theory, so they keep
you uncomfortable. And uh, it's unfamiliar. I think I know this.
I think we actually have an article on this. Like
the floors are undulating, undulating floors and uh yeah, I've
heard of that. They also like um kind of moonscape floors,
um angled like ceilings that just it doesn't sound like
(02:13):
a very pleasant place to live. Pretty interesting, this one
guy and these things go for there there. Just to
build them, they cost millions of dollars, but they have
built several most of them are lost in in Tokyo.
And this one guy who lives in one with his
family so that he's lost like twenty pounds and doesn't
have hay fever any longer since he moved in there. Yeah. Um,
(02:33):
but there their their whole firm is basically in jeopardy
because they were heavily invested with one Bernard made Off,
who you may may have heard. This guy's reach extends everywhere.
We're talking Kevin Bacon, right, and there's a six degrees
joke in there somewhere. Um, I imagine Kiras Sedgewick, since
(02:53):
Kevin Bacon is in there, Jaja Gabor Spielberg, Spielberg, And
that's just like the tip of the iceberg, right. I mean,
thousands and thousands of people were invested with this guy
and it turned out he was a Ponzi schemer. That's right.
It's a Ponzi scheme. Yeah, Chuck likes to say it
like that in a tribute to the Italian immigrant Mr
(03:14):
Charles Ponzi, who was running around in the twenties. And actually, yeah,
you want to talk a little bit about Mr Ponzi, Yeah,
I didn't know this until I read the article. Is
pretty interesting, and you know, Ponce's all over the news,
so it's kind of cool to get some background. Yeah. Oh,
and also we should probably say thanks to all the
people who wrote in and requested that we do this podcast.
This one's for you. Right. Bernie Madoff made off excuse
(03:36):
me himself, wrote in Yeah he did. He's like, hey,
can you tell everybody what I did? So, Yeah, in
the nineties, Charles Poncey. What he did was at the
time there was if you want to send mail overseas,
you would include what was called an international reply cupon
well if you wanted to reply, right. But it's basically
sort of like, uh, when you get something from you know,
(03:57):
magazine and the postage is prepaid to short in the card,
you know, right, it's it's prepaid so that you get
that back to say, hey, these people got that exactly right,
So this is what you did back then. Uh. He
had an idea. He said, Hey, if I go over
and buy these in a different country where they're cheaper,
I can come back and sell them in the United States, right,
And he could do this because these things were internationally recognized.
(04:20):
There was same in any country. But apparently they went
for different prices in different countries, so it's not a
bad business model, right right, I would say so. Uh,
And things went pretty well at first. He got a
lot of investors and made some pretty good money. But
the return that he promised, which what was it again,
it was a ridiculous promise. It was I think return
in forty to ninety days. So yeah, that should have
(04:42):
been a red flag right then we'll talk about that later.
But yeah, that didn't go as well as he thought. Um,
but he kept getting investors and he just kind of
kept this all quiet. So what he would do is
he would payback some to the initial investors based on
the money that the current investors were giving him, and
just kind of kept going in a cyclical way until
he had a lot of He started, you know, taking
(05:04):
a little money for himself and uh ended up having
you know, millions of bucks office in the nineteen twenties
before it finally crumbled. Um as a big scan. Well,
the reason he was found out was because somebody apparently
calculated that um, there would have had to have been
about a hundred and sixty million of these things extant
for him to be making the money he was making,
(05:26):
and the problem is that there was only twenty seven thousand.
That's that's kind of what found him out. But what
I got from this, what I got from reading about
Ponzi schemes, is that, Um, Charles Ponzi didn't appear to
be a huckster from the outset like he This is
actually a legitimate business that he was trying to run. Sure,
I think it was an act of desperation. Um, And well,
(05:49):
we should probably talk about exactly how Ponzi schemes work. Right,
they're pretty straightforward and simple. But I can't imagine that
as they just get bigger and bigger, you start to
eat a lot of rolaids. Right. I bet that that
was the original Ponzi scheme, and I'm sure he was
nervous as that was going if scheme scheme very nice.
So do you want to give some detailed explanation on
(06:11):
how Ponzi schemes work? Yeah, it's actually pretty simple. What
you do is you, um, you come up with an
investment a shell sort of, and you get people to
invest in You're in whatever you're saying you're gonna invest in.
In this case and in the original Ponzi scheme, it
was these reply coupons, but nowadays it's usually like a
(06:34):
stock thing. So you get these folks to invest, and
you take their money and essentially, uh use that first
rung of people to attract other people to invest. And
once you start getting other investors, you can pay back
those initial folks and they can go on record and say, oh, yeah,
you know I made a great return. That's right. And
then that more investors right and more wrongs, and you
(06:56):
just kind of it's sort of like robbing Peter to
pay Paul the entire your time, right, but you're pocketing
like Ponzi did some for himself. Right. At a certain point,
you can start skimming off the top, right. And but
it's not like it take the money and run proposition.
It's to take the money, stick around and pay people
off as much as you can. The problem is is
to like, people don't divest very easily. When they get
(07:18):
a better and unbelievable return on something, they want to
keep investing. Sure, So if you're like, no, no, you
can't invest anymore, Uh, the people are gonna start to
get suspicious. So you've got your first wrong, You've got
your second wrong. And then so on and so on
and so on. But to sustain it, you have to
keep adding more and more wrongs. But the more wrongs
you add, more difficult it is to pay everybody back.
(07:38):
So it's inevitable. But as some people will know they're
investing in a Ponzi scheme, some of those first wrong people. Yeah,
and yeah, from what I understand, people can actually make
money off Ponzi schemes. You get in early enough, and
you're smart enough to get out while they getting is
good because those are the people are gonna get paid first,
so they can vouch and say this is a really
great deal, right exactly. So yeah, so the whole that
(08:01):
that's pretty much a Ponzi scheme. And if it sounds
a lot like a pyramid scheme, do you you would
be right. Uh, it's virtually the same structure. The one
big difference is is that in a Ponzi scheme, you're
not asked to do anything. You're just an investor. They
just want your money. Uh. In a pyramid scheme, generally
you have to do something like you are buying in
uh to sell something? Sorry, well no, actually, um on
(08:24):
Amway site, they have uh like on an f a
Q section. It's like, is am Way a pyramid scheme?
And they're like, we're a pyramid model. Schemes the wrong
word to use, And actually the pyramid model has worked
for legitimate businesses Amway, Mary kay Avon, Um pamper Chef.
(08:45):
So yeah, so I mean it can work and it
doesn't necessarily have to be illegal. That that that's the
other distinction between Ponzi schemes and um pyramids models is
that Ponzi schemes are always fraud completely faults because it's
an investment, but the money's never invested. So it's so simple.
When I read this, I was just like, it's the
(09:07):
beauty is in its simplicity, Just like, give me a
bunch of money and I will keep it and get
more people to give me money. I'll give you a
little bit, and it's just amazing how that works. Can
you imagine being such an edgy, savvy investor that you
actually knowingly invest in ponzi schemes? Who does that? I
don't know. I bet there's some names on the on
the Maid off list. Yeah, I bet, I bet um,
(09:29):
But no, he did everything alone. We'll get to him
in a minute. Allegedly, not more, he confessed, buddy, Well,
we're certain things are still alleged at this point. All right,
well let's go with it. You're such a c o
a dude. But I appreciate the oh because that includes me. Um.
So Ponzi wasn't the guy who came up with a scheme.
He he did it so well that they named it
(09:50):
after him. But the earliest one we know about goes
back to UH eighteen eighty early eighteen eighties in Boston
with a woman named Sarah Howe. I don't think I
know about this one, okay, So she actually actively and
purposefully built a Ponzi scheme, although you know what, with
it being forty years before Charles Ponzi showed up, she
(10:11):
probably didn't call it that to herself. What was her name,
Sarah how scheme? Yes, if she were, if she did
have enough foresight to know that it would eventually be
called a Ponzi scheme, how would it sound in her
head when she said, this is the kind of scheme
that I'm carrying out. It's a um Anyway, Miss Howe
(10:32):
basically put together a m a group of thousands of
women investors, and UH invested in women's um women's liberty bonds,
I think is what they were called. Uh, that's supposedly
what the investment was for, but no, it wasn't. She
just basically carried out a Ponzi scheme UM and she
(10:52):
managed to rake in about half a million bucks before
she was caught. Uh. And then another guy shortly after
the turn of the century. His name was William Franklin Miller,
and he also builked investors for about another half a million.
And this is, you know, substantial enough to be remembered
a hundred years plus later. But Ponzi was the first one, right,
(11:15):
Ponsi was the first big one, I should say. Uh.
And then you don't really hear about anybody in in
the world of Ponzi schemes. I mean, I'm sure you can,
but nobody huge doing it right now. Well until Lou Pearlman.
Is that where you're going? I was going to go
to the Balkans first bolicity, Mr Pearlman. Okay, Yeah, this
is one of my favorites because his associations are kind
of funny. H Lou Pearlman, who I think you have
(11:37):
to say his name like Lou Pearlman. That's how I
got that impression as well. And he kind of looks
like that kind of guy too. He was. He kind
of funded the boy band craze in the nineties. And
I remember the Backstreet Boys because of the tattoo you
have on your neck, and uh, in Sync was the
other one. I don't know if you have a tattoo
of instinctly, okay, I was covering all my bases. Uh.
(11:58):
So he funded these bands. Uh, And it turned out
in two thousand six that he was running a big
Ponzi scheme. He had been for like twenty years and
a lot, you know, in Sync and the Backstreet Boys
were kind of funded on this Ponzi schemes. I don't
think funded kind of at all. I think they were
fully fully funded. Yeah, and this this guy created the
back Street Boys and in Sync and funded him with
(12:19):
illegal money. So those yahoo's kind of oh Ponzi with
their careers, yes they do. Yeah, well, their careers past tense,
right sure? Um timber Lakes done well for himself? Was
he in one of us? H J T I don't
know who that is. Um. Right back to Albania, Yes,
Albania basically a whole bunch of people were working this
(12:41):
big ponzi scheme, which from what I understand also uh
can extend the life of a ponzi scheme. Uh. Lou
Perlman is an unusual animal, uh, and that he could
carry it out single handedly for twenty years. Um. But
in Albania, for a while a group of ponzi schemers
UM had had one set up that builked these investors
(13:04):
out of two billion dollars before it collapsed, which is
in Albania, that is thirty of their gross domestic product.
That's huge, Like how to cripple a country? Yeah yeah,
and yeah, so yeah, I think Albania is probably second world. Um. So,
I think a hit like that is just ginormous. And
that was a big problem when it happened. It was
(13:25):
because when people found out, they started riding in the
streets and fires broke out and people died. Yeah yeah,
So that's the Albania, the old Albania ponzi scheme. And
we should note that Lou Pearlman he went to jail
or received a sentence of twenty five years for conning
three hundred million dollars, and apparently every million he paid back,
(13:46):
they cut a month off of sentence, which seems really fair.
I think so. But Pearlman million dollars sounds like a lot.
It ain't it was. And then two thousand and eight
came along the big daddy dude, this guy Bernard made Off,
one of the founders of Nastak. Yeah, which is one
reason why it works so well, because he was beyond
(14:07):
legit He was beyond legit um. Although he his One
of the other reasons he was so successful was that
he was smart. First of all, like Sarah, how he
used affinity fraud. An affinity fraud is where you are bilking.
You're you're using the inclusiveness of a of a group
(14:28):
to um against themselves, right, So he uh used his
membership in a a uber wealthy, very exclusive Jewish country
club down in Florida to prey on investors at first um.
And you know, the affinity fraud happens a lot like
and usually it happens with religious groups. Somebody comes in,
it's like, hey, I'm a Lutheran two and I've got
(14:49):
this great investment. Since he's a Lutheran, you know, he
seems up standing, you trust him, and then that's that.
But made Off very much used affinity fraud, at least
at first, and then news of his amazing returns got out.
But as I was saying, the reason he was so
successful is he he didn't pull a Ponzi and say
I'll get you fifty percent return in forty five days.
(15:10):
You know, Uh, he offered reasonable. I think eleven percent
was the average returns over the long haul, right, That
was the key. It was very believable, well to an extent.
Have you ever looked at our prospectus, the t RO
price prospectus or prospectus. Yeah, have you ever noticed, like
if you look at it like one year, three years,
five years, ten years, and it'll be up at one
(15:33):
year down, three years down, five years up. He was
offering like a straight even kill eleven percent return. You
couldn't lose, right, So that actually should have been a
red flag, but it wasn't. Um And in two thousand one, Barons,
the Financial rag they published a an article on him,
specifically saying made Off can't be offering these returns. Mathematically speaking,
(16:00):
this isn't possible. No one listened, But chief among the
people who weren't listening was the SEC. Yeah, and they've
been under a lot of fire lately. Because they did
not listen. They did not investigate, even when it was
kind of handed to them, like hey, several times, actually
here there were like two or three formal complaints h
to them and they never followed up. Well. One reason why,
(16:21):
and this is even another reason why he was successful,
is he was also running a legit business alongside it,
so he could sort of defer, you know, when he
needed to pay people back and things were getting tight,
he could pull a little money out of his legit
business and do that, and apparently did so promptly if
somebody wanted to um withdrawal. Yeah, they got to check
like that, no questions asked, Like when Kevin Bacon was like,
(16:43):
we're heading to Barbados and I need a million dollars
because I'm gonna buy a hut on the beach. Right,
I'm trying to hide my wife from her shame for
being in the closer right. Yeah. Um so yeah, made
Off was very, very successful, to the tune of what
twenty to fifty billion dollars he made off. I know
he's got the perfect name for it. I should have
been like, wait, what's your last name? Though I'm not
(17:04):
investing that. Every headline has already used that, so that's
probably stale by now. Yeah, thanks for that, Chuck. So
what what can you do? Chuck? How do you stay
out of a Ponzi scheme unless you're a very savvy
investor who's totally unconscionable. Well, uh, there's a few things
you can look for, um. And and it also should
be noted that a ponzi scheme is pretty much a
one way street to collapse. There's really no way to
(17:27):
pull it off in the long run sustainable unless I
think a lot of people might start these and think, well,
I can get out at a certain point, pay everyone
back and make a lot of money. Um. But yeah,
it's it's not a good working model in the end. Well,
apparently the point to a ponzi schemers to keep it
going until they die. Yeah, which is considered a big
success because you live like a billionaire and then uh,
at the end, you know you die or you know,
(17:49):
you off yourself. Speaking of that, did you know that
um after he was found out made off with spending
a hundred and sixty grand a month on personal security? Ah? Yeah,
do you know how many in Manhattan? Do you know
how many bodyguards that buys you. That's like delta force money.
(18:09):
Yeah yeah, uh so, yeah, some things you can look for. Um.
The obvious, of course is if it sounds too good
to be true, it is. That's the oldest adage in
the book, and it's true across the board. Uh So,
someone's making you promises on big returns, then you should
probably turn around and walk away. Don't let anyone pressure
you into doing well. Pressure that's another point too, is
(18:32):
I mean, it's usually going to be a high pressure pitch,
like you have a very limited time window maybe for
as long as the person standing there, um, and you're
made to feel like a jackass if you don't take
them up on it. Um. But yeah, yeah, pressure is
definitely one one of the factors. And even one like
you said that uh like made off scam where he
(18:53):
would not promise huge returns, that might make it a
little more believable. But everything, like you said, fluctuates, So
if it's a consistent even if it's a consistent like
five growth for years, then that should be a red
flag right there. And also you should um ask questions
and and demand answers as well, because I mean, if
you're just if you have a friend who has a
(19:15):
friend that has this great investment and you cut him
a check and it turns out to be a Ponzi scheme. Well,
t s for you. That was a stupid thing to do.
You should know what your money is being invested in.
You should know who's investing it. You should and even
if it's legitimate, you should be asking these questions if
it's through any of the major brokerages, by out how
many fees there are. Just just that's a good habit
(19:37):
no matter what. Uh. And the other thing is um
even if you're involved in a Ponzi scheme, even if
you get sucked in, uh, you should never it should
never break you and leave you bankrupt. Excellent point, Chuck,
because this is probably the most impotant important point. Well, now,
I say diversification is a key to a good portfolio,
and this is definitely true here. You should not invest
(19:57):
all your money in one thing. You just setting yourself
up for bankruptcy. And whether it's a Ponzi scheme or not.
Because you do all real estate and you're just totally
invested in real estate in two thousand and seven, you're
in big trouble. I mean, even Donald Trump, Uh, hit
the lowest of the lows at one point we all forget.
I think he's lost a lot of his old edge
that he used to have. He's made some bad decisions
(20:20):
like the TV show. Sure no one needs to see that,
you know. And if you if you do find yourself
in a Ponzi scheme and you're not the type to
take the law into your own hands with like a
tire iron or anything like that, you could always contact
the SEC. I don't know that they'll do anything, and
they probably won't, but it's worth a shot anyway, right right, Oh,
and we should just as a sidebar here, I know
(20:40):
that Madeoff did confess, but they are. There's a SEC
is still coming under fire because he's claiming that he
acted alone and didn't have any help with this, which
is really really hard to believe, just because paperwork alone
for scheme this size would be huge. And uh, some
people think out there that he probably had his family
(21:01):
involved and then did everything he could to cover for
them and take the hits right yet to come out. Well. Also,
even if they weren't involved, their salary came directly from
the bilking of other people, even if they somehow we're
just totally unaware of it. You know, it makes it
kind of I don't know, it puts it puts their
own wealth in question, right, So yeah, so that's a
Ponzi schemes. That was very good, Chuck, Thank you, Chuck.
(21:23):
Last time I'll say that. Are we are we going
to talk about our spoken word album? Yes? Yeah, and
then maybe we'll talk about blogs and then listener mail
stick around. All right, So we do have a spoken
word album, our first one, and it is about the
economy and economics. Everyone knows that we are in the
second Great Depression, and um, we just kind of decided
(21:47):
to make a spoken word album about that. That that's
such a an off a slightly off kilter description. It's
more like a guide, right right, possibly a guide to
the economy, that's what it's called. But it's very big, right,
Like there's a lot of stuff in it, right. Yes,
it's called the Stuff you should Know, super Stuffed Guy
(22:09):
to the Economy, and it's got expert interviews. Josh and
I get out of studio, we go in uh around
the working Farm, chicken Farm, don't spoil it. And Jerry
are awesome producer. She did excellent sound design and it's
got more bells and whistles, and it's it's definitely a
cut above the silliness we do here each week. Yeah. Yeah,
And you can find it by typing a super stuffed
(22:33):
in the search bar iTunes. It's frankly chuck and I
think it's worth it. I think so. So if you
want to get it, knock yourself out, get it a
couple of times if you like support us, Yeah, because
it blows up your computer after four to eight hours,
So unless you keep downloading it fresh each time, and
I'm paying for it over and over again, not sure
at all. All right, So there was that plug that
(22:54):
was plugged the blog. Yes, we've been plugging the blog now.
I hope you guys aren't sick of it yet. Um.
But Josh and I blog a couple of times a day.
He post once, I post once, and it's called stuff
you should know. You can find it on the right
hand side of our homepage at House of Works dot com.
And we just cherry pick interesting news items and kind
of like what we do here, except it may not
(23:15):
be enough to flesh out of full show. So yeah,
and a couple of times we've we've posted on listeners
suggestions like why don't you guys do this? Actually? Um,
so yeah, keep keep the ideas coming. We love them.
We do it keeps us from having to do any
real research. Just true, and you know what that leads
us to listener mail time. That's right, Okay, Josh, this
(23:37):
is an installment of stuff we should know, stuff we
should have known. No, it's not, because sometimes it's additional things.
Qu's saying that. This one is from Sarah, and Sarah
wrote in UM about the word theory versus hypotheses. Sarah
is a teacher, and we say all the time, someone's theory,
(23:58):
someone's theory, and he says, we've been misusing it. She
says in the thinking cap podcast you repleted, you repeatedly
referenced theories about savantis um and left hemisphere damage, and
scientifically speaking, these are not theories, their hypotheses. So her
basic point is that a theory is not just an
educated guest. It's h something that a lot of detail
(24:20):
and research has gone into to get to the point
where you can call it a theory, like the theory
of evolution, which is often dismissed as oh, it's just
a theory, but a theory is actually got a lot
to it. So Sarah wanted us to set the record straight,
so we did that. Another little minor correction here, josh
said at one point we were the only country that
(24:41):
uses uh, the imperial system. I thought we got this
out of the way with the bodies on ever supodect,
we did not officially U s Burma, Liberia and Myanmar.
Myanmar and Burma are the same place, Okay, have it
ever since the junta? It's now Myanmar? Look at you?
So Rich from Omaha, Joshua from You, Claire Wisconsin, Stephen
(25:04):
from Newark, Delaware, and Jeanne or Gene Gene. They all
wrote in and told us that, and I have one
more and I like this one. Stephanie wrote in and
told us that on our afrods X podcast, we're talking
about phallic symbol and fallacies, and we were talking about
an oyster. Apparently there is a word for something that
(25:24):
resembles the female genitalia. Yeah. I was interested to hear
this because we kept saying female genitali. And I wish
that she had written in before then. And we knew
that phallus only represented the male genitalia, but I did
not realize there was one for female. Yannick y o
n I see and she said, Yannick or Yanni is
Sanskrit for the word womb vulva in place of origin.
(25:46):
And she said she just wanted to tell us this
because for one of the first times in her life
she actually knew something Yonnick. So thank you Stephanie for
the Yeah, thanks Stephanie getting it. I'm processing it right now.
So Yanni, canoa remember the famous tennis player? Yeah, I
knew that there's any reference to female, genn tell you Odd.
I don't wonder if he knows that. I'm sure sort
of surely. But now, so, if you want to point
(26:07):
out that there are other words Chuck and I are
unfamiliar with, basically, let me know that I shouldn't call
my crackpot theories theories but hypotheses instead, or just say hi.
You can send us an email to Stuff podcast at
how stuff works dot com for moralness and thousands of
(26:28):
other topics. Is it how stuff works dot com m
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Join me on this podcast as I navigate the murky waters of human behavior, current events, and personal anecdotes through in-depth interviews with incredible people—all served with a generous helping of sarcasm and satire. After years as a forensic and clinical psychologist, I offer a unique interview style and a low tolerance for bullshit, quickly steering conversations toward depth and darkness. I honor the seriousness while also appreciating wit. I’m your guide through the twisted labyrinth of the human psyche, armed with dark humor and biting wit.